Last Saturday, my
intellectual friends and I held a thrilling debate on a book by James Robinson
and Daron Acemoglu titled `Why Nations Fail’. The book became an instant
bestseller when it was published. Five Nobel laureates in economics endorsed
it. Four other economists I hold in high esteem did that same. Jarred Diamond,
whose work on the role of geography in the economic prosperity got me thinking
in 1998, said good things about it.
At our debate, Ramathan Goobi, an economist and lecturer at
the Makerere Business School who has internalised the book made a good
presentation of its core argument. It is hard to argue against so many Nobel
laureates in economics and say they are mistaken or deluded. Yet this is what I
am setting out to do.
The core argument of the book is that prosperity is entirely
determined by institutions. Countries with “inclusive institutions” i.e. those
what allow every citizen political rights which translate into economic freedom
incentivise their citizens to be more productive. Countries with “extractive
institutions” enrich a small clique of elites at the expense of the many.
The authors argue that it does not matter where a country is
located geographically or its culture and initial endowments. As long as a
country has inclusive institutions, it will prosper. To illustrate this point,
they look at the differences in economic outcomes between North and South
Korea. The two nations have same culture and geography. Yet their economic
fortunes are entirely different. North Korea has per capital income (nominal)
of $665 while South Korea has $27,800 i.e. 42 times richer.
On this basis, the authors conclude that geography and
culture are irrelevant to prosperity. Chapter 13 is titled “Why nations fail
today: institutions, institutions, institutions” to underline their core
argument that seek ye first inclusive institutions and the rest will be added
unto you.
There is no doubt that institutions are critical to economic
prosperity. However, it is absurd to argue that they are all that matters.
Institutions interact with many other factors like geography, culture, history,
initial endowments (like human capita), timing etc. to produce prosperity. In
other words (and to use a cliché) institutions are necessary but not a
sufficient for prosperity.
The book is a study of income inequality. What led the
authors to an absurd conclusion was that they made nations their unit of
analysis. Had they looked at inequality generally – among regions, or ethnic
groups or even individuals within the same country they would have realised the
centrality of other factors.
Take the different states in the USA that are subject to the
same inclusive institutions. The richest state in America in 2018 is
Massachusetts with a per capita income of $65,545 while the poorest is
Mississippi with a per capita income of $31,881. Why this difference?
First, let us assume that somehow, the institutions of
Connecticut are more inclusive than those of Mississippi. Even within
Connecticut itself, the different ethnic groups living there and facing the
same institutions have Jews, whites and Asians richer than blacks and
Hispanics.
One can argue that blacks and Hispanics are discriminated
against hence their low-income levels. But even within black and Hispanic
communities some individuals are richer than their co-ethnics. Among whites
there are wealthy people like Bill Gates with a net worth of nearly $91
billion, and many other white people who sleep on the streets without any
income at all.
Income inequality exits between nations but also within
nations. And within nations it exits between certain regions of the same
country and certain ethnicities within the same country or even between
individuals in the same ethnic group. There are factors of history, culture,
geography etc. that shape these inequalities between nations, regions, social
groups and individuals. Institutions are only one such factor.
Let us return to the example of North and South Korea. The
GDP of South Korea is 82 times larger than that of North Korea ($1.4 trillion
versus $17 billion). But when one looks keenly at North Korea, one notices that
they are able – in spite of sanctions, low levels of both GDP and GDP per
capita – to achieve exceptionally high levels of technological sophistication.
For instance, North Korea is able to place satellites in
space, manufacture highly sophisticated tanks, armored personnel careers,
fighter jets, intercontinental ballistic missiles, advanced artillery, etc.
Indeed, if the two nations went to war, North Korea could easily destroy her
rich southern neighbour. North Korea is able to achieve technological feats
that African countries with 200 times her GDP cannot even attempt.
Even a casual observer would immediately notice that what is
holding North Korea from prosperity is the choice of institutions – and I guess
this is the reason why Robinson and Acemoglu arrived at their absurd
conclusion. But it is wrong to move from North and South Korea and conclude
that if Uganda or Malawi were given inclusive institutions, these nations would
produce products that would rival Sam Sung.
Robinson and Acemoglu ignored human capital in their
analysis of prosperity, an argument I have been making for many years now.
While it is true that Ghana and South Korea had roughly the same per capita
income in 1960, there are other endowments that South Korea possessed that
allowed it to transform from a backward peasant society into a modern
industrial economy. One such critical endowment is human capital.
Beyond a shared language and culture, a long history of
nationhood and a state built on meritocratic recruitment, South Korea had high
levels of human skills. In 1960, it had well over 58,000 engineers and
technicians. As early as 1933, over 40% of total industrial output in Korea was
produced by home-based factories; Koreans owned 26 banks, not to mention the
large number of managers and marketing executives.
There were also 1.5 million Koreans working in Japan and
another 1.5 million working in Manchuria, China, who returned after 1946. Many
worked in manual jobs but many others in factories where they had manufacturing
experience. These initial endowments were fundamental to South Korea’s rapid
transformation.
It is not true that if inclusive institutions were hurled on
Democratic Republic of Congo with only nine university graduates, no engineers,
managers, architects or experienced civil servants – not to mention absence of
a shared language, history of nationhood and statehood, it would in a few years
achieve what South Korea did. Therefore institutions matter and matter a lot.
But they need many other factors including culture, geography, and initial
endowments like human capital to bring prosperity to nations.
****
amwenda@independent.co.ug
No comments:
Post a Comment